Reflections on the Home Affordable Loan Modification Program

The Obama Administration announced the H A M P program with great fanfare on March 4, 2009. It was a bold step to address the foreclosure problem which was clearly swirling out of control. $75 Billion committed to reducing loan payments. Projected to help more than 4 million homeowners.

It Began With a Premise

Foreclosures in the country were occurring at break neck speed and something had to be done. The plan was conceived based on the premise that homeowners would pay their mortgages—IF they could. Despite being upside-down, borrowers are committed to retaining their home. Warren Buffet has been quoted as saying “Commentary on the current housing crises often ignores the crucial fact that most foreclosures do not occur because a house is worth less than it’s mortgage (upside down). Rather, foreclosure takes place because borrowers can’t pay the monthly payment they agreed to pay.” It is a premise with which I agree and an honorable premise on which to craft a resolution.

A Look At the Program

H A M P or Home Affordable Loan Modification Program was launched with the specific and ambitious goal of making sure that millions of Americans would have the opportunity to remain in their homes even though market dynamics and other factors beyond their control meant the value of the property had declined AND they were struggling with payments but they wanted to keep their home. The goals were clear, the mandate receiving strong support. It seemed a good thing—for all the right reasons.

Reduction in Payment

To address the ‘ability to pay’ the H A M P plan provided guidelines for getting those payments under control. Conservative banking guidelines for many years had shown that mortgage payments at no more than 31% of a borrower’s income usually prove to be sustainable so that OLD underwriting guideline was used as a benchmark for what should be the new goal to help us get out of this mess.

To accomplish this, lenders and their servicing partners were provided with guidelines to make this happen:

a. First, Reduce the payment amount so that it was no more than 31% of the borrower’s monthly income

b. Reduce the interest rate to as low as 2% as a way to get the payment down farther

c. Extend the term of the loan—up to 40 years—further reducing the monthly payment

d. If the payment amount was still more than 31% of the borrower’s monthly income, THEN funds from the H A M P fund would be used to pay whatever was needed to get the payment down to 31% of monthly income

Adjusting the principle balance was not an option addressed by this plan even though it was a logical step (in the opinion of this writer) and had been the objective of the ‘cram down’ component of the bankruptcy reform legislation defeated late in 2008.

Criteria for Participation

H A M P was created as an option for owner-occupied properties with outstanding balances of $729,750 or less. The homeowner was required to demonstrate a hardship caused by a factor or factors beyond their control. It applied to loans originated prior to January 1, 2009. Modified payments were set up for 3 months, as a test to see if the borrower could afford the new payment.

If they made that threshold, then the loan modification became permanent (for 5 years, so let’s say, semi-permanent).

Investors or speculators were exempted from participations. So if you had bought into the hype that building a piece of America was the way to financial security, you were on your own. Consequently, it was expected by a number of observers that the number of foreclosures in this segment would rise dramatically, and RISE they have.

Incentives

In order to facilitate this voluntary program, the H A M P initiative provided for financial inducement to all parties to participate. Servicers (and/or the lenders whom they represented) were to receive $1,000 for each completed modification. The plan called for an additional $1,000 for each year the modification remained in place with a cap after 3 years. The borrower could get $1,000 off their principal balance for each year, up to five years.

“Net Present Value” Test

In order to determine which loans should be modified, lenders/servicers were to conduct a ‘net present value’ test. The test was supposed to compare the expected cash flow which would be generated under the program (with a modified, performing loan) as compared with the expected cash flow if the loan were not modified (and continued non-performing if the borrower were already in default). Let’s see, some $ paid, versus $0 paid. Not a hard test really. Seems like a no-brainer to me.

Good intentions for a worthy cause. So how did it go wrong. Why have consumers across the country been yelling fowl by the hundreds of thousands? Why has the Administration acknowledged that the program has not reached nearly the scope that they projected? We’ll provide those assessments in tomorrow’s blog. Don’t miss it.

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(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)